OTTAWA, Aug 20 Reuters Canada39;s annual inflation rate cooled to a 40month low of 2.5 in July, matching forecasts, and core inflation measures eased as well, data showed on Tuesday, keeping the Bank of Canada on track to cut interest rates again in September.

Analysts polled by Reuters had forecast inflation to cool to 2.5 from 2.7 in June. The consumer price index was up 0.4 on a monthly basis, also in line with forecasts, Statistics Canada data showed.

The slowdown in headline inflation in July was largely driven by lower prices for travel tours, passenger vehicles and electricity, the statistics agency said.

The inflation rate is now the closest to the Canadian central bank39;s 2 target since 2.2 inflation in March 2021, when prices were beginning to rise after about a year into the coronavirus pandemic.

The easing should keep the Bank of Canada on track to lower borrowing costs again next month. The Bank of Canada trimmed its policy rate at its last two consecutive meetings, bringing it down to 4.5.

Money markets expect another 25 basis point cut at the bank39;s next rate announcement on Sept. 4 and are nearly pricing in a total of three more cuts this year.

The Canadian dollar pared some gains after the CPI report with the local currency trading up 0.04 to 1.3628 against the U.S. dollar, or 73.38 U.S. cents. Bond yields for the twoyear Canadian government bonds fell 3.5 basis points to 3.416.

After lowering its key overnight rate last month, the BoC indicated…